The Impact Of A Rate Increase

December 30, 2016

When the Federal Reserve decided to increase interest rates on December 14, it was only the second time in a decade that the financial entity felt consumer confidence and economic markers were strong enough to support the increase. But while savers will benefit after years of earning minimal returns, the move may hold mixed reviews among CRE investors.

Federal Governors have been predicting the increase for months, and once the election was settled in November, the markets confirmed an attitude of confidence among American investors. Now that the 0.25% move is a go, the commercial real estate industry is making adjustments of its own.

Usually, interest rate increases lead to higher borrowing costs for property investors, which impacts profitability and future acquisitions – especially for REITs. However, this singular short-term move has been anticipated for months, allowing property investors to factor the increase into their pricing in advance. Economists say the Fed’s decision to move short-term rates this month will have little impact on the economy or commercial real estate.

Chief CRE Economist at the NORC at the University of Chicago Jon Southard indicated that the impact would be felt more significantly over the long run. “The market is anticipating basically between two and four more (increases) next year in terms of what the Fed will do,” he told Bisnow. Combine these future rate changes with the economic moves of a new political power, and inflation becomes a factor. If Trump’s policies on corporate and individual tax cuts and job creation move forward, economists anticipate higher inflation in 2017. The Fed, in turn, will attempt to balance it with incremental hikes throughout next year.

While future rate changes are yet to be solidified, there are still positive factors in play for CRE and the overall economic outlook. The rising consumer confidence that played a role in the decision to increase rates could positively increase development demands, and the market is anticipated to remain strong. Intelica Commercial Real Estate continues to monitor economic and regional factors to help clients navigate changing conditions with confidence.